Barbara Kostiuk v. Minister of National Revenue, [1989] 2 CTC 2328, 89 DTC 541

Sarchuk, T.C.J.:—The appeal of Barbara Kostiuk is from a reassessment of income tax in respect of the 1981 taxation year in which the respondent, in accordance with the provisions of subparagraph 69(1)(b)(i) of the Income Tax Act (the Act), added to her income the amount of $30,749 as proceeds of disposition of one Class A share of P.G.B. Holdings Ltd.

The facts giving rise to this reassessment follow. The appellant is the daughter of Peter Bodnarchuk and Olga Bodnarchuk. On February 6, 1967 Peters Holdings Ltd. was incorporated under The Companies Act, S.S. 1965,

c. 131. On April 6,1967 four Class A common shares were issued, one to each of Peter Bodnarchuk, Olga Bodnarchuk, the appellant and her sister Shirley Bodnarchuk. The appellant was ten years old at that time. The articles and bylaws of the company restrict share transfer to the extent that approval of the directors was required. The directors at all relevant times were Olga Bodnarchuk and Peter Bodnarchuk. The cost of the share to the appellant was $1 and the fair market value of the share on December 31, 1971 was $1. Peters Holdings subsequently became P.G.B. Holdings Ltd.

In reassessing the appellant the respondent assumed, inter alia, that on or about September 8, 1981 the appellant transferred the share in question to her father, Peter Bodnarchuk for $1; that the fair market value of the share at the time of transfer was $30,750 and that she realized a capital gain on the sale of her share of $30,749. On this basis the respondent asserts that he properly determined the capital gain of the appellant on her transfer of her share in P.G.B. Holdings Ltd.

Evidence was adduced from the appellant and from her parents, Olga and Peter Bodnarchuk. Although in a very general way the appellant was aware that her father had incorporated a company and that shares had been issued to members of the family until very recently she had little if any understanding of the significance of these facts. She was not aware of her rights as a shareholder; she never received any notices of or attended any shareholder's meetings; she never received any dividends, nor was she involved in any way directly or indirectly in the operation, management or direction of the company.

In 1980, as a result of continuing marital difficulties, Olga Bodnarchuk commenced an action against Peter Bodnarchuk in the Unified Family Court of Saskatchewan claiming a division of property and interim support. In the course of these proceedings the parties entered into a separation agreement dated September 8, 1981 (Exhibit A-5). On that same date Olga Bodnarchuk executed a form of resignation as director and officer of P.G.B. Holdings Ltd. and a transfer of her interest in the Class A share owned by her in P.G.B. Holdings Ltd. to Peter Bodnarchuk in consideration for the settlement of their matrimonial property (Exhibits A-8 and A-9). These documents however were not delivered to Peter Bodnarchuk at that time.

It appears from the separation agreement that it was the intention of Olga and Peter Bodnarchuk that the Class A shares in P.G.B. Holdings which were in the names of their daughters, Shirley Bodnarchuk and the appellant, be treated as a matrimonial property asset and be transferred to the husband, Peter Bodnarchuk. How that was to be achieved remains unclear.

A memorandum dated February 18, 1982, found in the Peter Bodnarchuk file in the offices of his solicitor indicates that the resignation and share transfer executed by Olga Bodnarchuk in 1981 were delivered to him on that date. In addition, the memorandum states that a "Share Transfer in duplicate for Barbara for Peter to have her sign (unsigned at this time)” was also delivered to him. To the best of Peter Bodnarchuk's recollection the appellant, Barbara Kostiuk, has never signed the share transfer.

Barbara Kostiuk for her part, was aware that the share in P.G.B. Holdings which was in her name was referred to in her parents' separation agreement. She recalled talking about it but could not remember the specifics of that discussion. She remembers being in the offices of her father's solicitor on February 18, 1982 to sign some documents; that her sister was there as well; that she executed a lease agreement with her father (Exhibit A-2), but that to the best of her recollection never saw nor signed either one of the share transfers prepared for her signature, one dated 1981 and one dated 1982, which documents (Exhibits A-11 and A-12) were also found in the solicitor’s file.

On that same date, the separation agreement was filed in the Unified Family Court and an order settling the affairs of Olga Bodnarchuk and Peter Bodnarchuk was issued by the Deputy Local Registrar. By virtue of this order both parties were released from any further and other obligations under the separation agreement. There is no reference in this order to the disposition of certain marital property assets by the parties to the appellant and to her sister (farm properties), nor is there any reference in the order to the disposition or transfer of the Class A shares held by the daughters in P.G.B. Holdings Ltd.

One further exhibit must be referred to, consisting of the 1981 annual return for P.G.B. Holdings Ltd. dated March 31, 1981; the 1982 annual return of P.G.B. Holdings Ltd. dated March 31, 1982 signed by Peter Bodnarchuk and the 1983 annual return of P.G.B. Holdings Ltd. dated March 2, 1983, also signed by Peter Bodnarchuk (Exhibit R-1). The 1981 annual return lists Peter George Bodnarchuk; Olga Bodnarchuk; Shirley Ann Siba; and Barbara Ann Zadorozniak (the appellant) as shareholders. The annual returns for 1982 and 1983 originally listed Peter George Bodnarchuk and Olga Bodnarchuk as directors, no other shareholders being shown. Both of these returns also disclose that the name of Olga Bodnarchuk was stroked out. Neither the appellant nor Olga Bodnarchuk had ever seen these returns.

The primary position advanced by counsel for the appellant is that there was no disposition in the 1981 taxation year. In the alternative counsel contends that the appellant was not the beneficial owner of the share in issue.

The respondent's position can best be ascertained from certain admissions and from the assumptions pleaded. They are:

6. In reassessing the appellant as he did and with respect to those matters here in issue he assumed, inter alia, that:

( a) the appellant acquired the legal and beneficial interest in 1 Class A share of P.G.B. Holdings Ltd. on April 6, 1967;

(b) the cost of the share to the appellant was $1.00;

(c) the fair market value of the share on December 31, 1971, V-Day was $1.00;

(d) the appellant transferred the share to her father in 1981 for $1.00;

(e) the fair market value of the share in 1981 was $30,750.00;

(f) the appellant realized a capital gain on the sale of her share of $30,749.00.

The respondent also admitted the following allegations of fact set out in the appellant's notice of appeal: the appellant is the daughter of Peter Bodnarchuk and Olga Bodnarchuk; on April 6, 1967 she was issued one Class A common share and one Class A common share was issued to each of Peter Bodnarchuk, Olga Bodnarchuk and the appellant's sister, Shirley; that the said shares were shares of a company named Peter Holdings Ltd. (subsequently changed to P.G.B. Holdings Ltd.), and the appellant at that time was a minor. The respondent further admitted that the appellant's parents separated and that a resulting separation agreement dealt with the transfer of shares to the appellant's father.

No other facts were assumed or pleaded.

Counsel for the respondent relies principally on the annual returns as filed and submits that they support the respondent's assumption that the appellant transferred the share to her father in 1981. Counsel also relies upon the evidence given by Mr. Bodnarchuk and in particular his failure to explain why his daughters were no longer listed as shareholders in the 1982 annual return. Counsel suggests that his conduct establishes that the transfers were in fact made.

Although the evidence was patchy and incomplete certain conclusions can be reached. One Class A share was issued in the name of the appellant, Barbara Kostiuk on April 6, 1967. At some point of time she became aware of this fact but at all relevant times appears to have treated her interest therein not as a beneficial owner but as a nominal owner. She did not at any time receive any benefits, dividends or other interests in respect to the share issued in her name. While she understood that the share was "hers" she appears to have had absolutely no understanding or concern as to her rights or her interest therein. It is also evident that Olga and Peter Bodnarchuk intended that her share interest therein. It is also evident that Olga and Peter Bodnarchuk intended that her share and that of her sister be transferred to Peter Bodnarchuk as part of the marital property settlement and that documentation to that effect was prepared. There is no evidence that such a document was ever executed by the appellant. I also draw the inference from her testimony that she was not particularly opposed to such transfer although it must be said she never had the benefit of independent advice.

Furthermore, notwithstanding the existence of a great deal of equivocation in Peter Bodnarchuk's evidence as to the circumstances under which the annual returns were prepared, signed and filed, they suggest quite strongly that he believed that by virtue of the separation agreement and the subsequent court order he was entitled to ownership of all of the shares in P.G.B. Holdings Ltd. and proceeded to file the returns on that basis. His evidence relating to the appellant's failure to execute a share transfer and his failure to insist upon obtaining it was equally vague and equivocal.

However in my view neither Peter Bodnarchuk's actions nor the annual returns can support the Minister’s assessment. The error as to the identity of the directors in the 1982 and 1983 returns puts in question the accuracy of their contents and makes them somewhat unreliable. The 1982 annual return, which was not signed by Peter Bodnarchuk until March 31, 1982, and which for the first time no longer lists the appellant as a shareholder, does not prove that a transfer of the share took place in 1981. The appellant testified that she has no recollection of ever executing a transfer. The testimony of Valerie Makela, a secretary in the solicitor’s office, establishes that as late as February 18,1982 Peter Bodnarchuk's solicitors (and I draw the inference that they prepared this document) prepared a share transfer which if executed by the appellant would have transferred whatever interest she had in the Class A share of P.G.B. Holdings Ltd. to her father. There would have been no necessity for this document if a share transfer had been executed by her in 1981. There is no other evidence that a transfer, if one took place, was effected in 1981.

The relevant statutory provision, subparagraph 69(1)(b)(i) provides:

69.(1) Except as expressly otherwise provided in this Act,

(b) where a taxpayer has disposed of anything

(i) to a person with whom he was not dealing at arm's length for no proceeds or for proceeds less than the fair market value thereof at the time he so disposed of it, or

be shall be deemed to have received proceeds of disposition therefor equal to that fair market value;

Before the Minister can invoke the provisions of section 69 of the Income Tax Act it is necessary that there be a disposition in the taxation year in issue. Although the evidence presented on behalf of the appellant raises questions the simple fact of the matter is that the primary assumption made by the respondent has been cast into doubt. I am satisfied that the assumption made by the Minister that there was, in taxation year 1981, a disposition of a Class A share of P.G.B. Holdings Ltd. by the appellant to her father has been rebutted.

While it is not necessary to deal with this issue, it warrants noting that the evidence raises a substantial question as to whether the appellant was the beneficial owner of the share in issue. For example, the conduct of the parties in treating the shares as marital assets in the separation agreement as well as the appellant's casual approach to her interest therein, suggests something other than legal ownership. It is a fact that all of the parties involved are relatively unschooled in business matters and it is highly unlikely that Peter or Olga Bodnarchuk would be able to explain why the company was incorporated; why Class A shares were issued; why the shares were issued to the respective parties as they were; and whether Olga Bodnarchuk and the daughters were meant to be beneficial owners of the shares or trustees for Peter Bodnarchuk. The appellant, for her part, and for whatever reason, chose not to obtain independent advice, but appears to have been prepared to go along with whatever her mother and father suggested or whatever her mother and father's solicitors suggested.

The appeal is allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that there was no disposition by the appellant in the taxation year in issue and that accordingly the addition by the Minister of the amount of $30,749 to her income as proceeds of the said disposition was in error.

Appeal allowed.